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Thursday, July 09, 2015 2:59 AM

Absurd IMF Warning on US Rate Hikes

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The IMF has only one legitimate purpose that I can figure out: To continually write position papers and articles silly enough to keep bloggers loaded with material for rebuttal.

The Wall Street Journal provides a case in point with IMF: U.S. Economy at Risk of Stalling Next Year if Fed Raises Rates Prematurely.

"The Federal Reserve risks stalling the U.S. economy by raising interest rates too early, the International Monetary Fund warned Tuesday as it detailed its call for the central bank to delay a move until 2016."

The idea that a single rate hike or two would sink the economy now but not in 2016 is of course ridiculous.

The IMF's primary concern is the rising US dollar.

If investors continue to plow into dollar assets, particularly given weaknesses in Europe, China and other emerging markets, “growth could be significantly debilitated,” the fund warned. The IMF estimates each 5% appreciation of the dollar could cut a half-percentage point off U.S. growth.

The IMF wants a weaker dollar for the US and a weaker euro for Europe. How's that supposed to happen?

The IMF is also worried about China. Does it want a weaker yuan too?

Obvious Problem

The problem should be obvious, but obviously it isn't, so I will spell it out: It's mathematically impossible for every currency to depreciate against each other simultaneously.


The IMF is worried about the loss of credibility if the Fed hikes now and has to reverse later.

"Both the European Central Bank and Sweden’s Riksbank were forced into rate reversals in 2011, and the Bank of Japan seesawed through rate moves in the 1990s and 2000, fund economists noted. Such an about-face puts the Fed’s all-important credibility at stake, the IMF said."

In reality, there is not a central bank on the planet that has any credibility. Bubble after bubble is the norm. The Fed failed to predict the dotcom bust, the housing boom, the housing bust, or the great recession.

The Fed has no credibility to lose. But the Fed does have good company. The credibility of the IMF is nonexistent as well.

The number of global GDP downgrades by the IMF is staggering. Heck, for years on end the IMF could not even get Greece correct. Greece missed countless IMF GDP estimates.

IMF Admits Greece Needs Debt Restructuring

At long last, the IMF admits what any person with half a brain knew half a decade ago: Greece Will Need Debt Restructuring.

“Greece is in a situation of acute crisis, which needs to be addressed seriously and promptly,” Ms Lagarde said. Getting out of that crisis would take both reforms by Athens and a “debt restructuring”, she said.

That's actually the first solid statement by Lagarde in years that I agree with. The irony is the eurozone ministers, Germany, and the creditors don't want to go along with it.

Mike "Mish" Shedlock

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